Crime Log

Posted on March 4, 2007 by Russ

The last few days have seen a few interesting stories of fraud and deceit in the tax world. We begin in the heart of Texas, travel to the East Coast, and end up with two stories that have a California connection.


Carl Herrera is a former NBA player with Houston, San Antonio, Vancouver (now Memphis), and Denver. He has also been a member of the Venezuelan National Team. His next gig may be with the ClubFed team; he surrendered to federal authorities last week after being indicted on charges of not paying $554,471 in taxes between 1994 and 1997.

Remember our story on Joe Mammana, the Yardley, PA philanthropist accused of not paying tax on over $4 million? The Associated Press reports that he will admit to the tax fraud in a plea deal next week.

The Fresno Bee has a story this past week about the IRS making some changes in the whistle-blower program. The tip program now offers rewards of up to 30% of what’s recovered.

And finally, a story that’s not really about taxes. But it’s too good to pass up. From the AP headline: “Alleged California madam threatens to sell list of D.C. clients.” Deborah Palfrey of Vallejo (north of San Francisco) was indicted last week in Washington for allegedly running a prostitution ring. Her service has, according to the government, employed 132 ladies and generated $2 million in income. Her attorney says it’s a legal escort service; the prosecution charges that it’s racketeering. She’s accused on RICO charges and money laundering. Her attorney notes that Ms. Palfrey only has one asset left to sell to fund her defense: her customer list. I wonder if anyone in D.C. is sweating right now?

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Impersonation Pays Until Found Out

Posted on March 1, 2007 by Russ

I never inspired to be a football player; I’m just not big. I do enjoy watching football games, as my friends are well aware.

Joe Bowden enjoyed a nine-year career as a linebacker with Houston, Tennessee, and Dallas (he’s now a coach at Central Oklahoma). Antowain Smith was a running back for Buffalo, New England, Tennessee, and New Orleans. And these two former NFL players figure into a tax fraud case.

Anthony Quinn Welch is accused of “borrowing” Bowden and Smith’s names, and filing tax returns on their behalf from 1997 – 2002. Mr. Welch allegedly opened bank accounts in their names, created phony addresses for them, and filed tax returns…and received over $2 million in refunds. And he deposited the refunds (using phony signatures) into his bank accounts.

Most likely the scheme fell apart when the IRS saw the real tax returns for Bowden and Smith. One individual, two tax returns? Not particularly likely. Mr. Welch faces four counts of filing fraudulent tax returns, and two counts of filing false claims. He’s looking at a lengthy term at ClubFed if found guilty.

News Story: Click2Houston.com

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Wade Cook to Face Retrial

Posted on March 1, 2007 by Russ

Wade Cook, convicted last week for not reporting all of his income, will be retried on tax fraud charges. Additionally, his wife, who also had a hung jury, will also be retried. The Seattle Times reported that the new trial will be held in Seattle, probably this Spring.

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Tax Court Doesn’t Like the Idea of a Video Poker Professional

Posted on February 28, 2007 by Russ

Today, the Tax Court looked at another unsuccesful gambler who thought he was a professional. This individual, though, gambled at video poker, not live poker (or poker tournaments).

Video poker differs substantially from live poker. Instead of playing against other players (and having the house (casino) take a small fee, or “rake,” from each pot), video poker is played on a machine against the casino. Almost all video poker machines play five card draw, with your goal to make the highest scoring hand (based on the pay table on the front of the machine). Computers have been used to evaluate each game, and have computed the long-term payback rate with perfect play.

Our unlucky taxpayer played video poker in the Chicago area. He considered it a side job, as he earned $51,840 as an engineer. As the Court noted,

“Petitioner testified that he tried to only play on machines with an expected payout value of a 100-percent return, meaning he thought he would never lose money; he also testified that the only way to get a return of more than 100 percent is to play on a “progressive” machine. He further testified that despite his hours of practice on a computer and diligent study of the perfect way to play the game, “it didn’t work”. [citations omitted]”

Luck was not with the petitioner, but he filed as a professional gambler in 2003, claiming $1.3 million in income and $1.3 million in losses (or a $0 overall Schedule C). The IRS believed he should have filed as an amateur, and would take his winnings on line 21 (other income) and his losses as an itemized deduction. If that were the case, the petitioner would owe another $3,068 in tax.

The Court felt that the petitioner wasn’t a professional gambler, and ruled for the IRS. In order for an activity to be a business, it must be conducted with continuity and regularity, and the purpose must be to make a profit.

“Occasionally, devoting all of one’s free time to a particular activity may be a sign of addiction.* Further, the amount of time spent engaged in the activity is not the most significant aspect of the trade or business analysis. More important is the taxpayer’s actual or honest objective of making a profit. (*At trial, petitioner testified that he had himself barred from his usual casinos for 5 years to prevent him from continuing to gamble there.)”

But the petitioner didn’t treat video poker as a business. He failed to maintain books, which a professional should do. He never sought help when, after five losing years, he continued to lose in 2003. Then the Tax Court notes,

“We are additionally unconvinced that petitioner’s gambling activity meets the standard for being a trade or business because we are not persuaded that an individual who gambles against a machine that is programmed by a casino can have, as his or her primary purpose, income or profit. After all, such a machine is on the floor to make money for the casino and is not there to provide income or profit for the casino’s patrons. For most individuals, gambling against a machine that is programmed to make money for the casino constitutes what the Supreme Court in Commissioner v. Groetzinger, 480 U.S. 23 (1987), characterized as a sporadic activity, hobby, or amusement diversion. For other individuals, gambling against such a machine may become a habit or an addiction. In neither scenario is it a trade or business with the participant’s primary purpose being income or profit. [citation omitted]”

I strongly disagree with the Court about video poker. I know that it is quite possible to be a video poker professional. It takes practice, skill, and effort (and if you’re a professional, you will maintain books, because it’s the only way you will know how you’re doing). This is a memorandum decision, and doesn’t establish a precedent. However, it does tell you what the Tax Court is thinking, and it’s clear that you would have to show substantial statistical records in order to be considered a professional video poker player.

That said, it is clear that the petitioner in this case didn’t meet the standards of being a professional gambler. You do need to keep records and treat it like a business. And the petitioner didn’t. And admitting that you’re addicted to gambling in your own testimony probably didn’t help matters at all.

Case: Ferguson v. Commissioner, T.C. Memo 2007-30

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More on Potential Budget Problems

Posted on February 26, 2007 by Russ

The nonparitsan Legislative Analyst’s Office released a report last week which paints a very gloomy picture for California’s finances. Elizabeth Hill, the head of that office, is quoted in the Orange County Register, as saying, “We face a very challenging budget situation…we are urging that decision makers act now and not wait until the May revision.”

What’s the problem? Slumping tax revenues. The weak housing market could change Governor Schwarzenegger’s projected $2.1 billion surplus into a $726 million deficit.

However, neither the Governor nor legislative leaders seem in a hurry to change their rosy forecasts. Republican and Democrat leaders all say ‘let’s wait and see.’ In any case, the LAO’s analysis serves as a wake-up call to all that the Golden State could become the Bronze State later this Spring.

News Story: Orange County Register

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Fraud, With a Capital F

Posted on February 21, 2007 by Russ

It’s time for yet another round-up of tax fraud. We have some of the usual suspects, but there is one that rises to the top.

I wrote about Wade Cook in December 2005
 when he was indicted for tax fraud. On Tuesday Cook was found guilty of seven charges of failing to pay taxes on $8.9 million of income between 1998 and 2000. The jury did deadlock on one charge against Cook. His wife, Laura, had a much better outcome: the jury deadlocked on all the charges against her. The government proved to the jurors satisfaction that Cook took royalties from his books and moved them into a trust. Cook then used the trust to support a luxurious lifestyle. Cook’s attorney noted that he plans to appeal. You can read more about the Cook case here.

Meanwhile, some tax preparers are in trouble. In Orange City, Florida, Keith Warner had a good way of making a living as a tax preparer (until he was caught); he kept over half of the refunds that should have gone to his clients. And he also neglected to report his embezzled income on his tax return. He’s looking at a visit to ClubFed, and a fine of $500,000 (coincidentally, that’s about how much he pocketed), and restitution. Meanwhile, a preparer in nearby Polk County, Florida is accused of making up deductions for her clients. She’s accused of inventing $2.7 million of deductions for her clients. She could face 81 years in ClubFed if found guilty on all counts.

Newman, California is one of the small towns in the Central Valley. Bonnie Arnell, of Newman, also made up questionable deductions for her clients, and she has pleaded guilty to 39 counts of filing false income tax returns and 3 counts of making false statements to the IRS. She also had another problem—when she was supposed to show up for an audit, she never did (inventing excuse after excuse). She’ll be spending significant time at ClubFed.

In Columbus, Georgia, yet another preparer is in trouble with the law. In early February, Valerie Renfroe was arrested on charges of overcharging clients and putting false information on tax returns. She’s now being sought on additional charges of theft by deception.

Finally, in New Jersey an accountant and his children have been indicted on charges of conspiring to steal more than $500,000 from the state by inventing 745 applications for homestead rebate checks. The Philippine News states that Ronnie Lapuz used the accused accountant’s firm and that Achilles Amante had ‘doctored’ various documents to allow him to get a larger refund. “I was shocked when his children were arrested because I thought what he was doing was legal,” Lapuz told the News. The case resulted from a tip to the Jersey City Police Department that many refund checks were directed to a business owned by the accused.

Not a good week for some of the lesser members of the tax preparation community. Doctoring documents, inventing deductions, and stealing refunds. Oh, I forgot to mention that Achilles Amante apparently charged $65 to do a tax return, according to the Philippine News. His clients may have gotten what they paid for….I should mention that tax preparer fraud is on this year’s list of the “Dirty Dozen” tax scams. As the IRS says, if it sounds too good to be true, it probably is.

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IRS Street Addresses

Posted on February 21, 2007 by Russ

Most taxpayers use the Postal Service to send their returns to the IRS. However, you can use Federal Express, UPS, or DHL. The problem is the IRS doesn’t list the street addresses of their service centers anywhere on their web site if you need those to use a private delivery service. As a public service, here are the street addresses of the Service Centers.

Andover Service Center
310 Lowell St
Andover, MA 01810-4500
[978-474-9701]

Atlanta Service Center
4800 Buford Hwy
Chamblee, GA 30341
[770-936-4500]

Austin Service Center
3651 S IH 35
Austin, TX 78741-7855
[512-460-0176]

Brookhaven Service Center
1040 Waverly Ave
Holtsville, NY 11742-1129
[631-654-6583]

Cincinnati Service Center
201 W. Rivercenter Blvd
Covington, KY 41011-1424
[859-292-5185]

Fresno Service Center
5485 E Butler Ave
Fresno, CA 93727
[559-454-6334]

Kansas City Service Center
333 W Pershing Rd
Kansas City, MO 64108
[816-823-2076]

Memphis Service Center
5333 Getwell Rd
Memphis, TN 38118-7733
[901-546-4115]

Ogden Service Center
1160 W 1200 S
Ogden, UT 84404-5402
[801-620-4249]

Philadelphia Service Center
11601 Roosevelt Blvd
Philadelphia, PA 19154-2100
[215-516-5994]

Franchise Tax Board
9645 Butterfield Way
Sacramento, CA 95827

It’s very important to note that these addresses should be used only for private delivery services. Mail sent to these street addresses may be rejected as sent to a non-deliverable address and returned to the sender! Mail sent to a service center should be sent to the “normal” address of the service center; for example, here is where taxpayers filing their own Form 1040 returns should mail the returns to.

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Are Poker Tournaments Gambling?

Posted on February 20, 2007 by Russ

A very interesting case today from the Tax Court. A husband and wife play poker. The wife is a professional, playing in poker tournaments; the husband is not a professional. The wife wins some money playing in poker tournaments; however, her expenses exceed her income. Can she deduct the additional expenses and have her net income from playing poker professionally be a net loss?

In 2000, the wife earned $11,708, but she claimed a net loss of $29,933 on her Schedule C. Section 165(d) of the Internal Revenue Code limits deductions for gamblers to the amount of their wins. However, the petitioner claimed that tournament poker is not a form of gambling; instead, it should be looked at like a professional sporting event such as tennis or golf. Alternatively, they claim an equal protection argument.

The Court first examined tournament poker (and provided one of the best descriptions for the layman that I’ve ever read), and come to these conclusions about whether tournament poker is a form of gambling:

“Betting is so intrinsic to poker that it is nearly impossible to avoid using a word that implies gambling in any way when discussing the topic. Bets are placed on each hand, and each round of betting has consequences. Whether or not the chips being used to make these bets have immediate and tangible monetary value does not change the fact that the players are still placing bets, hoping to win. This is true even in a tournament setting.

Petitioners agree that the first poker tournaments held were, in fact, “wagering events”. For example, in those early games, “Each participant put up $10,000 and received $10,000 in chips.” The fact that the chips being used to place bets in tournament poker today only bear some fractional relationship to the dollar values of the prizes and/or entry fees does not change the basic nature of the game as a wagering activity.”

It’s hard for me to argue with this conclusion; while poker tournaments have become sporting events, poker is definitely a form of gambling.

The equal protection argument also fails.

“Petitioners argue that the benefits of being able to offset “exaggerated income” from very successful years by losses sustained in less successful years should be available to professional tournament poker players as much as they are to other professions.

Congress made a policy decision to treat businesses based on wagering activities differently. In the absence of Congressional action, we are not free to correct any perceived unfairness stemming from a rationally based policy choice. In Valenti v. Commissioner, T.C. Memo. 1994-483, the Court noted that treating businesses based on wagering and gambling differently from other businesses is a rational differentiation and not one that rises to the level of being violative of due process or equal protection.”

As I’ve written in the past, I believe the equal protection argument could succeed in the right venue. However, that venue is likely a District Court, a Court of Appeals, or the Supreme Court. That’s an expensive road to take to fight the IRS and the precedents that exist on this issue.

The Tax Court’s conclusion hints that they think the law should be changed:

“The moral climate surrounding gambling has changed since the tax provisions concerning wagering were enacted many year ago. Not only has tournament poker become a nationally televised event, but casinos or lotteries can be found in many States. Further, the ability for the Internal Revenue Service to accurately track money being lost and won has improved, and some of the substantiation concerns, particularly for professionals, no longer exist. That said, the Tax Court is not free to rewrite the Internal Revenue Code and regulations. We are bound by the law as it currently exists, and we are without the ability to speculate on what it should be. Accordingly, we hold that tournament poker is a wagering activity subject to the limitations of section 165(d).”

The petitioner in this case loses out on being able to deduct additional expenses; poker tournaments are just another form of gambling. For all gamblers it’s just another reminder that the Tax Code isn’t fair, but you have to live with it or get Congress to change it.

Case: Tschestschot v. Commissioner (T.C. Memo 2007-38)

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Stop Tax Haven Abuse Act

Posted on February 19, 2007 by Russ

Three Senators have introduced the “Stop Tax Haven Abuse Act.” Senators Carl Levin (D-MI), Norm Coleman (R-MN), and Barack Obama (D-IL) are targeting the 30+ offshore tax havens. Senators Levin and Coleman have led an investigation into these tax havens, and believe they shelter $100 billion in annual tax losses to the U.S. Treasury.

“It is simply unacceptable that some individuals are using offshore tax havens and secrecy jurisdictions to shelter trillions of dollars in assets from taxation,” said Coleman. “These tax schemes cause a massive revenue shortfall and, sadly, it is the honest American taxpayer who must bear a disproportionate burden of investing in areas like education and healthcare. We are introducing this bill to close these loopholes, shut down offshore tax schemes, and ensure that every American pays their fair share of taxes.”

I expect this bill has a good chance of passage this year. It may end up being tied to this year’s AMT relief act (whenever that’s introduced). The press release (from Senator Levin) lists the goals of the bill (available below).

Though this legislation targets the securities industry and the offshore trust industry, at least one other industry will be impacted by this bill (should it pass Congress): the offshore gambling industry. The Isle of Man and Gibraltar are two of those offshore tax havens, and they happen to be two of the main domiciles of offshore gambling firms. Depending on the actual text of the legislation (the bill is not yet available on the Thomas system) and any regulations promulgated by its passage, Americans might have even more difficulties in getting funds from the U.S. to the offshore gambling firms.

Thanks to the TaxProf Blog for the heads-up.

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Middle Class Tax Relief? From the Democrats?

Posted on February 18, 2007 by Russ

The Wall Street Journal on Friday headlines a possible attempt by the Democrats to enact middle class tax relief ($ubscriber pay link). With the Democrats now in control of Congress, they have enacted rules that require all tax legislation to be “revenue neutral.”

The big issue facing Congress is the extension of AMT relief. For the past several years, Congress has done one-year extensions of this relief. The Alternative Minimum Tax was designed to get 65 or so millionaires, back in the 1960s. If nothing is done, 25% of households will soon be paying AMT. If you’re unlucky enough to live in a high-tax state, and you have a large family (lots of dependents), you could be hit with the AMT even with an income of less than $100,000.

The Journal article suggests that the Democrats might enact long-term relief, but with corresponding tax increases to the wealthy. And the Journal hints that President Bush might go along with that idea.

I’ll keep you informed as the Congressional term continues.

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